Italy's political tensions weigh down European shares
* Euro STOXX 50 down 0.2 pct, Italy's MIB down 2.1 pct
* Italian shares still among cheapest around Europe
* Very thin trading volumes as UK markets shut for holiday
* Derivatives market halted after Eurex glitch
LONDON, Aug 26 (Reuters) - Italian shares led euro zone stocks lower on Monday, hit by renewed political tensions, while overall trading volumes were thin because UK markets were closed for a holiday.
Italy's FTSE MIB index dropped 2.1 percent and the country's bond yields rose after members of Silvio Berlusconi's centre-right party warned they would bring down the government if the former prime minister is expelled from parliament over a recent conviction.
Investors were rattled by the threat of a new government crisis, which could delay efforts to revive the economy.
Italian bank stocks, which have rallied since late June, were among the worst hit on Monday, with UniCredit, Intesa SanPaolo and Banco Popolare losing between 3.3 and 4.2 percent.
"People are nervous again about Italy's stability and the credit spreads are widening, but all in all this shouldn't derail the economic recovery which has already started," said Riccardo Designori, analyst at Brown Editore, in Milan.
"Italy has been the strongest stock market lately, so it's not a surprise to see some profits taken off the table. Italian shares' positive trend is intact, and this retracement will bring buying opportunities."
The three banks are still up 25-30 percent since early July, outpacing the Euro STOXX 50 index, which has gained 11 percent over the same period.
The blue-chip euro zone index ended down 0.2 percent at 2,821.45 points, while trading volumes were just 60 percent of the index's daily average volume of the past 90 days, making it the fifth lowest volume for the index this year.
Despite their recent outperformance, Italian stocks are among the cheapest in Europe, trading on average at 11.1 times expected earnings in the next 12 months, while the broad STOXX Europe 600 trades at 12.8 times expected earnings, Thomson Reuters Datastream data shows.
Elsewhere in Europe, Germany's DAX index gained 0.2 percent, France's CAC 40 lost 0.1 percent and Spain's IBEX dipped 0.4 percent.
"We're seeing some profit taking on southern European banks today, but generally speaking, investors' sentiment towards these stocks has improved lately, and this has been reflected in strong inflows," said Vincent Ganne, analyst at FXCM, in Paris.
According to investment flow data provider EPFR Global, European equity funds enjoyed solid inflows during the week ending Aug. 21, just as U.S. equity funds endured their biggest outflow since 2008.
A glitch on Deutsche Boerse's derivatives platform Eurex halted trading for over an hour, echoing similar problems on Wall Street's Nasdaq stock exchange last week.
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